A bill to amend the Internal Revenue Code of 1986 to provide special rules for purposes of determining if financial guaranty insurance companies are qualifying insurance corporations under the passive foreign investment company rules.
This bill would modify the passive foreign investment company (PFIC) rules to give special treatment to financial guaranty insurance companies. If a financial guaranty insurer meets a set of financial, accounting, and reporting tests (based on the Financial Guaranty Insurance Guideline and NAIC standards), the company could be treated as a qualifying insurance corporation for PFIC purposes—potentially avoiding PFIC taxation for U.S. shareholders. The bill also creates transitional rules for years during a specified grace period (2018 through the end of 2024) and imposes targeted reporting and regulatory guidance tied to these expectations. The Treasury Secretary would determine whether the guideline conditions are satisfied, and regulations would be issued to address machines for identifying and treating such companies that cease to be PFICs. In short: if a financial guaranty insurer meets the bill’s criteria, it could be treated as a qualifying insurance corporation rather than a PFIC, changing how U.S. investors in those foreign companies are taxed, with a defined transitional window and additional reporting obligations.
Key Points
- 1New special rules for financial guaranty insurance companies (FGICs) under PFIC standards:
- 2- An FGIC’s applicable insurance liabilities can include its unearned premium reserves if specific conditions are met, including GAAP reporting restrictions on losses/L&E and particular exposure ratios.
- 3- Conditions include a minimum financial guaranty exposure ratio (net debt service insured/reinsured to total assets) and a minimum state/local bond exposure ratio (net unpaid principal of insured state/local bonds to total assets), plus adherence to single-risk limit rules from the Financial Guaranty Insurance Guideline.
- 4- The guideline itself is defined as the October 2008 NAIC model regulation, with determinations made by the Secretary of the Treasury.
- 5Definition and scope:
- 6- A FGIC is defined as a company whose sole business is writing or reinsuring financial guaranty insurance as defined by the guideline and permitted under its provisions.
- 7- The rule includes how “financial guaranty exposure” and “state/local bond exposure” are calculated and linked to the company’s reported assets.
- 8Alternative test and reporting:
- 9- If the FGIC meets an “alternative facts and circumstances” test, it can be treated as satisfying the PFIC requirements.
- 10- Additional clarifications ensure certain items on applicable financial statements are treated properly for reporting purposes.
- 11Transitional grace period and relief:
- 12- A transitional provision applies to a “specified grace period” (the period from the FGIC’s first taxable year after 2017 through its last taxable year beginning before 2025) where the company could be treated as not a PFIC even if earlier it would have been.
- 13- For purposes of this grace period, certain legacy ratios (8-to-1 instead of 9-to-1) apply to determine PFIC status.
- 14- Regulations would address how to handle elections and post-grace-period treatment if a company ceases to be a PFIC as a result of these rules.
- 15Effective dates and reporting:
- 16- The amendments apply to taxable years beginning after December 31, 2024 (with reporting amendments applying after December 31, 2024).
- 17- The Treasury would issue regulations and guidance to implement the treatment and to handle transitional cases.